¿Hugo Chavez Es Mas Macho?

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Venezuela’s President (and president-for-life hopeful) Hugo Chavez caused his country’s capital markets to tank in a big way this week, by proposing to nationalize privately held assets in several strategic sectors of the Venezuelan economy. Some commentators have called this an act of lunacy, but we’re not so sure. Setting aside the man’s comedically brilliant theorizing — like the one about ancient extraterrestrial capitalists having raped the ecology of Mars long ago — we believe that if he’s dumb, he’s dumb like a fox. Chavez is essentially trying to diversify oil related revenues into other productive assets, increase control over how future revenues will be distributed, and strengthen his hold on power. Using the blunt instrument of government to ‘nationalize’ attractive assets at a steep discount to their intrinsic value is perfectly aligned with these strategic objectives. Unfortunately, over the long haul, his political shenanigans can only harm the future well being of Venezuelans, or at least those who are unable to escape, primarily because they will directly raise his country’s marginal cost of both human and financial capital (this claim is inspired by the work of our friend, economist Reuven Brenner; see, for example, http://www.cato.org/pubs/policy_report/v20n3/econgrowth.pdf).

Let’s look specifically at the case of Venezuelan telecomm CANTV, which involves something of a cross-border, mano y mano conflict, which we’ll bill by invoking the spirit of Bill Murray’s old SNL gameshow sketch, ¿Quien es mas macho? We’ll simply replace “Lloyd Bridges o Ricardo Montalban” with “Hugo Chavez o Carlos Slim”. Slim, a Mexican telecom magnate, recently offered to acquire a sizeable holding in CANTV at $21 per share. Apparently, something about this offer didn’t sit so well with El Commandante, and he decided to preempt the deal. Why?

• Economic necessity? The national portfolio of Venezuela continues to be concentrated in oil production, and the public coffers have benefited tremendously from the runup in crude prices and consumption. However, overall production capacity and output have suffered from government interference, and the government has taken on increasing financial leverage in recent years. Should crude prices fall to more normal levels, the country is likely to experience financial and social crises. By reaching for other strategic assets (see chart below), Chavez may be hoping to diversify government cash flows, and reduce their exposure to future oil price fluctuations. His desire to bring the Venezuelan central bank under state control may also be aimed at preventing an external financial crisis (though, like the other measures he’s enacting, it will cause more harm than good in the end).
• Socialist impulses? If we take him at his word, Chavez may believe that the Venezuelan government is able to acquire and manage strategic assets in a way that produces sufficient cash flows that can be invested for the benefit of the Venezuelan people, through education, health care, and other subsidies. Governments play an essential role in certain areas of public investment. However, they tend not to be effective managers of economic assets.
• Market manipulation? Put yourself in Carlos Slim’s shoes. A potential suitor for the shares of a public company is at the mercy of the market, and usually has to offer a premium to the prevailing market price in order to get a deal done. Now put yourself in Chavez’ shoes. You want to buy company X at a steep discount, and you have an incredibly blunt and effective weapon at your disposal — the power of a compliant national government. Simply threaten to nationalize certain industries and companies, and already high risk premia are suddenly doubled or even tripled (which is simply an inverse way of saying that an already depressed price falls another 50-70%). It’s not certain how much the government will eventually have to pay for publicly held assets, but it certainly gives him some negotiating leverage — a lot more than Slim or any other private suitor could generate through private networks. As Mel Brooks once quipped, “It’s good to be da king.”
• Power and greed? This is pure speculation at the moment, but it deserves investigation. What if economically meaningful ownership of these assets accrues to the politically connected, rather than the Venezuelan public? There is a longstanding tradition of elitism in the country, particularly in the area of resource and industrial management and administration. There is also a tendency for any unilateral government, regardless of its philosophical basis, to suffer from misallocation and misappropriation of capital. Chavez, who appears to be modelling himself as the next Fidel Castro, has set out some rather lofty personal ambitions for himself since being sworn in. While he appears to be successfully consolidating his power at the moment, such goals always have some cost attached to them. Viewed in that light, ownership of strategic assets could certainly be used to pay off critical allies, and thus maintain and expand power.

How this will all play out remains to be seen, but we suspect that all four of these possibilities are at work to some degree. However it turns out, we are highly confident in one aspect — that Chavez’ actions will continue to cost his country’s people dearly in terms of the improvements in living standards that accrue from economic and political dynamism. Chasing human and financial capital offshore and squelching internal dissent are all fine and good for Chavez and for those who benefit most immediately from his largesse. But for Venezuelan society at large, it’s a not-so-comic tragedy.